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Treasury & Cash Management: GLOBAL FINANCE CASH 25

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September 03, 2013
Author:
Ronald Fink

WHAT’S UP WITH CORPORATE CASH?

By Ronald Fink

Among various explanations for corporations’ letting cash build up on their balance sheets, the most compelling one is that economic growth is still slow. But some companies are not waiting for growth to pick up in order to spend more aggressively.

Cash continues to build on corporate balance sheets because of, and perhaps also despite, the anemic global economy. This paradoxical possibility stems from market conditions that generate positive corporate cash flow without inspiring companies to spend with any urgency. In fact, the Global Finance Cash 25—the 25 public companies worldwide with the most cash, cash equivalents and short-term investments on their balance sheets—saw those figures rise by 7.9% in their most recent fiscal year, according to data compiled for Global Finance by research firm Bureau van Dijk.

Not every cash-rich company got even richer in their latest reporting year. Exxon Mobil, for instance, fell off the list of 25 companies with the most cash and equivalents (before including short-term investments, which are defined as those maturing in three months to a year) after a $3.1 billion, or 10.6%, increase in capital spending in 2012, which reduced its cash and equivalents to $9.6 billion from $12.7 billion in 2011. Exxon also paid down its debt by $3 billion.

And a few other companies on the list of the 25 with the biggest totals of cash, equivalents and short-term investments—including Ford, General Electric, Johnson & Johnson, Mitsubishi, Sony and Toyota—also saw declines in their most recent year (the most recent reporting year is 2011 for Japanese companies, as they haven’t reported their 2012 results yet).

But those companies are exceptions to the general rule as well as to trends in their industries. In the US, cash still exceeds normal levels by about 30%, according to a recent study by the Georgia Institute of Technology, which found that cash, cash equivalents and short-term investments currently equal 13% of revenues. While that’s down from 16% at the height of the financial crisis, it’s still three full percentage points above the 10% level before the crisis. Cash for the 25 global companies with the most as of the recent fiscal year averaged more than 27% of revenues, and that includes non-US companies that usually tend to hold less cash than do US ones.

In contrast to Ford, the cash positions of non-US automakers Daimler and Renault, also on the list of the 25 global companies with the most cash, equivalents and short-term securities, increased by $5.7 billion and $3.2 billion, respectively, in 2012. For its part, Ford boosted its capital spending by roughly 25% last year, to $5.5 billion from $4.3 billion, helping drain $1.5 billion of the cash on its balance sheet in 2012.

Similarly, cash at three pharmaceutical giants among the top 25—Amgen, Merck and Pfizer—also advanced, while Johnson & Johnson’s cash declined, primarily as a result of a $10.5 billion stock repurchase.

Even J&J’s decline in cash reflects caution about growth prospects. A spokesman for J&J noted that returning cash to shareholders is a distant third among the company’s three priorities for capital allocation, after M&A and reinvestment in the business. Capital investment by J&J last year was flat, while R&D inched up from $7.5 billion in 2011 to $7.7 billion in 2012.

TECHNOLOGY CASH PILES GROW

Within the tech sector—another industry that dominates the list of companies with the most cash on their balance sheets—Apple, Cisco, Intel, Microsoft, Oracle and Samsung all experienced significant increases in cash, equivalents and short-term investments during their most recent year. Notably, Apple also has $92.1 billion invested in long-term instruments such as corporate equities and bonds and Treasuries maturing in more than one year. That’s more than three times as much as Apple holds in cash, equivalents and short-term securities, and over $16.5 billion more than any other company. The inclusion of long-term securities in calculating cash accounts for the $130 billion to $150 billion (depending on the source) that Apple is often cited in the press as having in “liquid assets” (see table: Top 10 Global Companies By Long-Term Marketable Securities, page 2).

Not that technology companies are just sitting on their cash. Intel, for example, has dramatically increased both capital spending and research and development during the past two years. This tack is in keeping with the company’s belief that “you invest through a recession” so as to emerge in a stronger position—a stance held by the company since it was first pronounced by its founder Gordon Moore, and reiterated in an interview with Global Finance by Intel vice president and treasurer Ravi Jacob.

The practical application of this stance is borne out by the fact that Intel’s capital expenditures (“capex”) in 2012 of $11 billion had risen to twice its 2008 level. Despite the increased spending, Intel’s cash increased by $3.4 billion in 2012, to $18.2 billion from $14.8 billion in 2011.

Although Exxon also increased capex and repaid debt—and saw its cash on balance sheet decline—other energy companies among the top 25, such as Chevron, Royal Dutch Shell, Petronas and Total, all saw their cash move in the opposite direction.

Among industrial conglomerates on the list with big finance subsidiaries, which naturally require a lot of cash, GE is an interesting exception to the trend. Though the company topped the list with $77.4 billion in cash, that total was down by more than $7 billion from 2011, or more than 9%, as the company has sought to shrink its finance subsidiary in relation to its industrial business. Sure enough, GE’s capital spending increased by almost $2.5 billion last year, or almost 20%, while total assets declined by 5%.

There are several theories as to why cash at other companies continues to increase. In the case of the US multinationals, some experts cite their aversion to domestic taxation at rates as high as 35%, if and when they bring the money home from foreign subsidiaries, and so, the thinking goes, they keep cash earned abroad stashed in banks but squarely on their balance sheets. That, in fact, may be one reason why US companies generally hold more cash than companies based elsewhere.

Other experts say global firms are holding big cash reserves to help make acquisitions, so as to build market share or scale. Regardless of the rationale for M&A, shareholders can be expected to demand at least some of these companies’ cash back sooner or later in the form of dividends or stock repurchases if acquisitions do not materialize or create much value.

Still other experts say the reason many companies aren’t reinvesting the money, either through M&A, capital spending or research and development, but remain reluctant to return it to shareholders is that they simply don’t want to admit they lack sufficient growth prospects to justify spending the money—in effect, signaling to investors that they’re no longer growth companies. And still others say companies holding significant amounts of cash are exhibiting caution in light of weak demand for their products and services.

WAITING FOR A GREEN LIGHT

David McLean, a professor of finance at the University of Alberta, contends that the latter explanation makes the most sense, since the only condition behind such rationales that is different than it was before the onset of the financial crisis is a shortfall in demand. “It’s the only thing that has changed,” McLean observes.

But even some observers who agree that companies are sitting on cash for precautionary reasons say macroeconomic conditions aren’t primarily responsible.

A paper recently published by the highly regarded Ohio State University finance professor René Stulz and two colleagues argues that companies hold more cash than necessary to fund their operations primarily because they increasingly believe their competitive advantage lies in intangible assets, which are most often the product of research and development. And using internal cash to fund R&D is cheaper than using outside funding. The academics’ reasoning: External financing is more expensive for R&D than it is for capital spending, because R&D, although more valuable, is more risky. “A detailed analysis shows that the increase in cash holdings of multinational firms is intrinsically linked to their R&D intensity,” Stulz and his co-authors wrote.

That view seconds one voiced in the November 2003 issue of the Harvard Business Review by Richard Passov, then-treasurer of Pfizer. He and his fellow researchers concluded that the decision to run large cash balances was “one of the key factors in sustaining the value of their intangible assets—which typically comprise a substantial portion of overall valuations.”

Interestingly, the era in which Passov wrote his article closely followed one in which many companies favored the use of debt, over cash, to finance acquisitions and investment—only to see a major backlash against leverage in the wake of the collapse of Enron and other heavily indebted companies. Almost 10 years later, corporate finance circles have yet to witness a comeback of the “cash is trash” mentality.

With $33 billion in cash on its balance sheet in 2012, Pfizer now ranks sixth in cash holdings among the top 25 global companies. But it ranks first in fixed assets to capital spending, showing that its focus is on research and development instead.

Intel’s Jacob lends further support to the idea that big R&D requirements dictate lots of cash. He points out that Intel learned that the hard way back in the early 1980s, when a lack of cash and high potential outside financing costs for research and development led it to turn to its biggest customer, IBM, for an infusion of equity to help fund innovation. IBM later sold its Intel shares at a profit, but Jacob says Intel doesn’t want to put even a sliver of its destiny in a customer’s hands again, however much their interests may align.

Still, some observers contend the theory that outside R&D financing costs militate toward keeping more cash on the balance sheet holds little water in the prevailing environment. Charles Mulford, an accounting professor at the Georgia Institute of Technology, says he doubts that companies are much concerned about financing costs at present, when such costs are at historic lows.

BE LEADERS, NOT FOLLOWERS

With those costs in mind, Intel issued $6.2 billion in senior notes last year, not to fund innovation so much as to finance a stock buyback, Intel’s Jacob reports, adding that low financing costs made such a transaction especially compelling in comparison with the tax cost of repatriating foreign cash for that purpose instead. Apple made headlines earlier this year for using a similar tactic to fund a $25 billion share buyback.

Yet if McLean and Mulford are right that macroeconomic conditions must change before corporate caution gives way, this creates a fundamental problem. Companies, paradoxically, may have to lead the charge in increasing spending—rather than being followers and waiting on increased spending by consumers before they start to invest some of their cash pile—to fuel the very demand they would like to see. The likelihood of such Keynesian economic bootstrapping is not high, however.

Jeff Wallace, a principal in consulting firm Greenwich Treasury Advisors, notes that GE’s German rival, Siemens, grew so concerned during the financial crisis about the solvency of its bank counterparties that it put €5 billion on deposit with the European Central Bank. Many analysts and regulators think banks in Europe and the US still need more capital to shore themselves up. Siemens did not respond to a request for comment.

And US glassmaker Corning was so worried about what might happen to short-term interest rates in the US during the congressional debate over the federal debt ceiling in the summer of 2011 that it withdrew a significant amount of cash from money market funds holding Treasury securities and deposited it in US banks. Sure enough, Washington, DC, seems poised for a fresh round of debate about the debt ceiling, even as US president Barack Obama at press time was focused on promoting new investment in infrastructure, research and education—while offering recalcitrant Republicans a deal on business tax cuts, including a lower rate on corporate income but a minimum rate on repatriated cash.

In any case, caution on the part of most companies makes those such as Exxon, Ford, GE and Intel stand out. But if that also makes this less-cautious quartet lonely, the chipmaker, for one, doesn’t mind. Then again, it may have little choice.

Intel readily admits it missed the technology industry’s recent embrace of mobile devices and tablets, while the PC business stagnated, as evident in the company’s most recent quarterly decline in both revenue and earnings from year-earlier levels. To catch up, Jacob says, the company must spend freely to develop new manufacturing technology despite an uncertain economy. Unlike many companies, Intel’s treasurer notes, it deals with changing macro conditions not by ramping up or cutting back spending on R&D or capital investment but by slowing or accelerating stock buybacks. (The 87 cents per share that Intel pays out to shareholders in dividends involves a less easily modified commitment, Jacob notes.)

Stock buybacks in that sense are the “dial” that the company uses to manage cash as conditions change, says Jacob. “That’s how we modulate it.”

Only time will tell if the unfashionable boldness of Intel and of its few fellow big spenders pays off. For now, their more numerous and cautious counterparts may be content to wait and see.

METHODOLOGY
The Global Finance Cash 25 ranks global public companies by cash, cash equi-valents and short-term securities on their balance sheets. Data is gathered from more than 70,000 public companies worldwide. It is a ranking of nonfinancial corporations—we exclude banks and other financial institutions from the rankings.

*Includes equity and debt holdings and other salable investments maturing in a year or longer.

Data valid as of July 18, 2013.

NORTH AMERICA

The 10 North American companies with the most cash on balance sheet are all US-based. GE and Microsoft top the list, though their cash is moving in opposite directions. The rest of the top 10 are dominated by tech and pharma companies, with Johnson & Johnson the only one to see cash decline in its most recent year—the result of a big stock buyback.

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

WESTERN EUROPE
The 10 Western European companies with the most cash on their balance sheets saw that sum increase by 22% in their most recent year. Telefónica of Spain led the increase, with a 77% rise, to $15.5 billion from $8.7 billion. Others that saw big increases were Royal Dutch Shell, with a 64% increase, Vodafone, with a 45% increase, and Daimler, with a 41% increase. The only companies on the list that experienced declines were Siemens

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

CENTRAL & EASTERN EUROPE
Cash varied greatly for those making our top 10 list in CEE. While cash at Acron Group of Russia more than trebled, that at Russia’s Svyazinvest fell by 39%. There was also wide variation in the totals, with $12.2 billion in cash at the top company, Surgutneftegas of Russia, exceeding the $536 million at the bottom company, Russia’s Rosoboronexport, by more than 20 times.

CENTRAL & EASTERN EUROPE: Top 10 Public Companies By Cash On Balance Sheet

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

LATIN AMERICA
The Curaçao-domiciled holding company of global group Schlumberger tops the list in Latin America, doubtless reflecting the island’s tax-haven status (see cover story, page 16). The list includes three other firms in the tax havens of Bermuda and the Cayman Islands: Marvell Technology Group, and two Chinese holding companies, Yingli Green Energy and Greentown China.

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

ASIA-PACIFIC
The Top 10 in Asia-Pac saw only a 4% overall increase in their total during their most recent year. Several companies saw big declines. Honda had the biggest percentage decrease, with a 15.6% reduction, to $12.8 billion from $15.2 billion, followed by Toyota, with a 15.2% decline, Mitsubishi, with a 5.9% decline, and Sony, with a 4% decline.

Companies where latest reporting year was prior to 2011 were excluded from the list.

Data valid as of July 31, 2013.

MIDDLE EAST/AFRICA
Changes in cash among the Middle East and Africa’s top 10 varied widely. Cash at Israel’s Teva Pharmaceuticals and Israel Electric more than doubled, while Ooredoo of Qatar saw its cash fall by 29%, to $4.1 billion from $5.8 billion, and that of South Africa’s Sasol.